1. (C) Summary: The November 14-15 visit of U.S. Treasury Secretary John W. Snow was an opportunity for discussion on

SIPDIS the "secrets" of Ireland,s success with policy-makers and businessmen who were the architects of Ireland,s Celtic Tiger economy. These key figures noted that while the concepts behind Ireland,s reforms had been simple, the political will to carry out the reforms had only come in the context of an economic meltdown in the mid-1980s. They said that good-faith relations with labor, investment in education, and a "dictatorial" leadership that exposed industries to the full discipline of the market had been key to success. Ireland,s skill in securing substantial EU support funds and in exploiting U.S. policy on corporate tax deferral was another important factor in Ireland,s economic turnaround. Looking ahead, the policy-makers cited both the need to ensure Ireland,s continued competitiveness as a magnet for foreign direct investment and also the role of education in shaping Ireland as an innovation-based, higher-value economy. Secretary Snow,s classroom discussion at Dublin City University (DCU) highlighted the role of higher education in promoting innovation and entrepreneurship. End summary.

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Introduction

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2. (U) The November 14-15 visit of U.S. Treasury Secretary John W. Snow was an opportunity for substantive discussion on the "secrets" of Ireland,s economic success. During a dinner hosted by the Ambassador and a lunch arranged by the Ulster Bank, Secretary Snow spoke with 16 policy-makers and businessmen (listed in para 12) who were instrumental in the emergence of the Celtic Tiger economy. A breakfast with the American Chamber of Commerce and a classroom exchange at Dublin City University (DCU) reinforced the points made by these key figures. The following are the principal insights that emerged from Secretary Snow,s visit (which are organized thematically, not in the sequential order in which they were discussed).

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In the Beginning: Political Will and Industrial Peace

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3. (C) Although the concepts behind Ireland,s reforms had been simple, the political will to carry out the reforms had only come in the context of the mid-1980s, economic meltdown, said Padraig O,hUiginn, former Secretary General in the Office of the Taoiseach (Prime Minister). O,hUiginn recalled drafting a proposal for economic recovery during that era, using ideas that were "apparent to any first-year economics graduate student" ) cut the fiscal deficit, spur competition, lower corporate taxes, etc. The ruling party at the time, Fine Gael, did not act on the proposal, but the Fianna Fail government elected in 1987 made the document the basis for the Program of National Recovery (PNR), which set forth the policies that underpinned Ireland,s economic turnaround. Fianna Fail,s "great advantage" at the time, said O,hUiginn, was Ireland,s economic crisis; with 18 percent unemployment and government debt at 130 percent of GDP, the political opposition, industry, and labor could not afford politically to impede solutions. The PNR,s linchpin was labor,s decision to accept a moderate wage increases in exchange for income tax relief, which became the basic approach to successive national wage-setting (Social Partnership) agreements. O,hUiginn recounted that the Government offered Irish pounds 700 million in tax relief in 1987 and also cut the fiscal deficit, forcing the closure of several hospitals and the retrenchment of 16,000 civil servants. He noted that the moderate wage increase incorporated in the PNR laid the foundation for Ireland,s competitiveness as an export platform and as a draw for foreign direct investment (FDI).

4. (C) The Government,s good-faith dealings with unions in negotiating Social Partnership agreements were, and remained, central to Ireland,s economic success, said Peter Cassells, former General Secretary of the Irish Congress of Trade Unions. According to Cassells, a shared understanding between unions and the Government on the importance of decent wages and housing for workers was the basis of labor,s commitment to the Social Partnership approach. He added that the transparency and inclusiveness of wage-setting negotiations, in which even the most disgruntled union representatives were given voice, were also instrumental to success. The typical industrial relations model in which union chiefs and politicians hammered out back-room agreements, in the mode of Lyndon Johnson and Lane Kirkland, would not have secured labor buy-in to economic reforms, Cassells asserted. He further observed that the Social Partnership approach might not be replicable in other EU Member States, which typically were more populous than Ireland and had more diffuse union structures.

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The Key: Human Capital

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5. (C) The chief source of Ireland,s success has been its educated labor force, said EU Commissioner-designate and former Irish Finance Minister Charlie McCreevy. He noted that the introduction of free primary and secondary education in the 1960-70s initially benefited other countries as much as Ireland, due to the emigration of educated Irish workers. As a young parliamentarian, moreover, McCreevy had warned that the 1970s, baby boom was a looming disaster, on the pretext that Ireland,s small, weak economy could not accommodate a future surge in labor, even with emigration. As it turned out, this large pool of young, educated workers became Ireland,s principal resource and the main attraction for foreign multinationals to establish subsidiaries in the country. Far from a disaster, the period 1987-2003 saw the addition of 600,000 jobs to the economy and drop in the unemployment rate from 18 percent to 4 percent. This success, concluded McCreevy, was primarily attributable to Ireland,s investment in human capital.

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"Dictatorial" Leadership

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6. (C) The implementation of reforms that underpinned Ireland,s economic recovery had required "dictatorial" leadership, said McCreevy. This involved incenitivizing industries to achieve efficiencies by exposing them to the full discipline of the market, even at the risk of bankruptcies. The challenge in this approach, explained McCreevy, was to press ahead with reforms in the face of elections, which provided temptations for politicians to adopt softer, more populist economic platforms. Secretary Snow observed that whereas the gains from economic reforms in any country tended to be diffuse, the losses were often concentrated in particular sectors or geographic areas, making it easier for those affected to organize political opposition. McCreevy commented that the test of any government was how well it explained to dislocated workers that the reforms responsible for their plight were good for the country. Indecon Economic Consultants CEO Alan Gray separately pointed out that Ireland had succeeded, through education, in giving workers the skills to move across industries, to the point now where those laid off did not ask, "Do I have any hope of a job?" but rather "Which one of my new employment choices should I take?"

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EU Help

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7. (C) EU tools, primarily structural support funds, were another factor in the emergence of Ireland,s Celtic Tiger economy, explained former Prime Minister (1992-95) Albert Reynolds and Ray McSharry, former EU Commissioner and Irish Finance Minister. Reynolds said that the Irish Government did not shy from viewing such tools as entitlements, since Ireland, as an island nation, faced additional challenges trading within the European Community. He and McSharry recalled that Ireland had negotiated well to maximize the level of EU support. For example, Reynolds claimed that he had obtained over euro one billion from Brussels as a result of a discussion with Chancellor Kohl in which Reynolds agreed to support Germany,s push for rapid EU enlargement. EU Commissioner-designate McCreevy separately echoed Reynolds, points, saying that French Finance Minister Sarkozy,s proposal to reduce EU support for new Member States that applied low corporate tax rates was shortsighted. McCreevy said that any EU measures to increase growth in the new Member States would redound to the benefit of the entire EU.

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U.S. Policy on Tax Deferral

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8. (C) The U.S. policy of tax deferral for foreign subsidiaries of American firms, combined with Ireland,s 12.5 percent corporate tax rate, underpinned the large influx of U.S. investment to Ireland during the Celtic Tiger period, observed Padraic White, former CEO of Ireland,s Industrial Development Authority (IDA). White recounted his numerous trips to the U.S. House of Representatives, Ways and Means Committee to defend tax deferral, and he argued that Senator Kerry,s plan to reverse tax deferral would have "killed Ireland," had he been elected. White believed that complaints by the U.S. public about the job outsourcing that accompanied U.S. investment flows were wrong-headed. U.S. subsidiaries in Ireland, he argued, were the principle reason that the United States had penetrated the personal computer, software, and pharmaceutical markets in Europe. He further observed that under-performing U.S. companies were typically those that had not attempted to expand overseas. Secretary Snow concurred that U.S. companies that were outsourcing overseas were those creating the most jobs in the United States. He highlighted, however, the political difficulty of explaining outsourcing to the U.S. public, recalling slogans during the recent election campaign that criticized "Benedict Arnold CEOs."

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A Propitious Lack of Monetary Policy Tools

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9. (C) An ironic feature of Ireland,s success has been the Government,s lack of monetary policy tools, remarked Cormack McCarthy, Chief Executive of the Ulster Bank. One might think that a country that had performed so well in terms of exports and investment would have relied heavily on interest rate and exchange rate levers, said McCarthy. As a euro-zone member, in fact, Ireland had ceded control of its monetary policy to the European Central Bank. The positive result, said McCarthy, were low interest rates. He believed that if Ireland had remained control of monetary policy, the Government would have been tempted to raise interest rates to slow rapid growth in the late 1990s. Instead, the low rates set by the ECB had been a boon to Ireland,s private sector and had lent a sense of stability and consistency to the Irish market for foreign investors.

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Looking Ahead: Competitiveness and Education

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10. (C) Looking ahead, the principal danger for Ireland is complacency, said Eoin O,Driscoll, Chairman of Forfas (the Government think-tank) and the Government-commissioned Enterprise Strategy Group (ESG). Echoing the ESG,s recently published findings, O,Driscoll cited the need to ensure Ireland,s continued competitiveness as a magnet for foreign direct investment (FDI), which, he said, had driven the country,s economic transformation. (U.S. and Irish businesspersons who attended the November 15 American Chamber of Commerce breakfast with Secretary Snow made similar points, noting that multinationals were increasingly attracted by low-cost manufacturing opportunities in China and India.) O,Driscoll said that, just as industry and Government had collaborated in the 1990s to make Ireland a base for leading bio-pharmaceutical and IT companies, the country needed a new shared vision to go another rung higher in the production of innovative, high-value goods and services. He note that this challenge would involve marrying innovation to better business practices, particularly in sales and marketing, and he praised the U.S. model of perfecting product designs in the market, as opposed to the European preference of the laboratory. While Secretary Snow cautioned against government attempts to pick winners in the market, he ventured that the key to economic prosperity rested with countries like the United States that fostered a culture of innovation and entrepreneurship.

11. (U) Secretary Snow,s classroom discussion with students, professors, and administrators at Dublin City University (DCU) was a venue for further discussion on the role of innovation, entrepreneurship, and academia in strengthening the Irish economy. The event took place at DCU,s "Invent Center," which serves as a business incubator for student entrepreneurs and community start-up companies. Secretary Snow highlighted the centrality of education and

SIPDIS intellectual capital to the modern, knowledge-based economy, and he explained that to embrace a market economy was to embrace ever-changing needs for new ideas and skills. He also noted the difficulties that economists had encountered in finding ways to capture creativity, "that spark," in modeling economic activity. DCU president Ferdinand von Prondzynski commented that the university had encountered a similar challenge, but espoused the belief that entrepreneurship could be taught, in the same way as poetry, painting, and other modes of creativity. Prondzynski also stressed that innovation meant little without business skills, and he cited DCU requirements for students to establish relationships Irish entrepreneurs who had both succeeded and failed in bringing new ideas to the market.

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Participants in the "Architect" Discussions with Secretary Snow

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12. (U) Participants in the Ambassador,s November 14 dinner for Secretary Snow were: Charlie McCreevy, EU Commissioner-designate and former Irish Finance Minister; Dermot Desmond, financier; Eoin O,Driscoll, Chairman of Forfas and the Enterprise Strategy Group; Padraig White, former CEO of the Industrial Development Authority; and Padraig O,huiginn, Former Secretary General in the Office of the Taoiseach. Attendees at the November 15 Ulster Bank lunch were: Ray McSharry, former EU Commisioner and Minister of Finance; Lochlann Quinn, co-founder of Glen Dimplex; Peter Cassells, former Secretary General of the Irish Congress of Trade Unions; Albert Reynolds, former Prime Minister (Taoiseach); Allan Gray, Chairman of Indecon Economic Consulting; Willie Walsh, CEO of Aer Lingus; Bill Harris, National Science Foundation Director; and Cormack McCarthy, David Pierce, and Michael Torpey of the Ulster Bank.